Subprime Bailout Plan - If You Have to Ask, It Isn't Shock and Awe
Remember on the eve of the start of the second Iraq War, the military said that the use of "shock and awe" would end the conflict swiftly? Remember how the early going was anything but? That's my reaction to the Subprime Rate Freeze Plan that was detailed today by the same administration. Touted as a tool to help troubled borrowers across the country, the plan is laughable as a useful tool of any scale. Indeed, if you have to ask it isn't shock and awe!
Tanta over at Calculated Risk has an enormously long post on the finer legal and technical aspects of the plan (warning: easily will take over 15 minutes to read entirely)
Punchline: "Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
There was allot of detail provided, but the take away points are both extremely limiting and laughable all at once
(lifted from Housing Panic (http://housingpanic.blogspot.com/2007/12/flash-oh-my-god-this-is-so-funny-heres.html)
* Mortgage had to be issued between January 2005 and July 2007
* ARM must reset January 2008 to July 2010
* You must not have more than 3% equity in your home
* Home must be worth more than the mortgage
* You must have income
* You must prove that you can make the payments
* You must not be more than 60 days past due
* Program is voluntary with the lenders - government has no authority or legal status
From my trusty back of the envelope calculations, I would hazard a guess that maybe as low as 20,000 people could possibly qualify, and a high end around 50,000. The MAJOR stumbling block is going to be the "Home must be worth more than the mortgage" qualifier. That one by itself will severely limit any deal making.
What's it All Mean?
The Cardinal rule that they teach you in fancy management schools is this; "In a crisis situation, you CANNOT be perceived as doing nothing. Any action is better than no action in this circumstance." That about sums it up. This action was done for the following reasons to varying degrees:
- Extends a new lifeline to troubled banks and lenders by giving the appearance of an improvement in the situation
- In a similar manner, prop up stock prices going into years end
- Make an effort to appeal to voters so the Republican party is not hurt in the coming election
- Restoration of some confidence in the system
I am not saying that any of the above will be accomplished. Certainly long term none of it will. But this was not a long term plan. It is a concerted effort to change the headlines for a while. In that it may be effective. Witness the market rally today. The plan will take a long time to make any improvements, and on a limited scale, but mortgage and home stocks like CFC and TOL were bid up aggressively for no reason. Wall Street never met a rally it didn't like, not even one with an STD.
Doom and Gloom Fix
If you are of the sort that likes to read behind the scenes information, there was a great post today over at Herb Greenberg's MarketWatch blog. Mr. Greenberg has been in contact with a mortgage insider through correspondence for some time, and the letter he posts today is the most clear and honest picture of the issue going forward I have ever seen. It is a must read and I will not forgive anyone that does not take a look: http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/
That's it for tonight. Fun day today. Please leave some comments and keep the discussion alive. I also have a new poll up, so please vote!
Have a good night.